Overtime Changes Could Shake Up the Franchise World in 2016

New definitions and new potential for legal exposure may be on the horizon

If the Department of Labor (DOL) finally rules on federal overtime regulations later this year, franchisees and franchisors could end up saddled with millions of dollars in added costs, according to a recent report released by the National Retail Federation. The impact of the new regulations would be felt strongly in three specific areas: raising the exemption eligibility ceiling, redefining duties and employee-related litigation.

Higher Exemption Ceiling

The Obama Administration’s plan revising federal overtime regulations would result in raising the overtime eligibility ceiling from its current level of $23,660 to as much as $50,440. That increase could not only create millions of dollars in extra expenses, but also potentially unevenly impact retailers operating in rural states, the report “Rethinking Overtime” concludes. The study found that increasing the salary threshold would disproportionately impact businesses in Iowa, Oklahoma, Oregon, Kentucky and Louisiana, which tend to have fewer stores and lower labor costs.

Currently, the overtime rules guarantee that workers earning up to $455 per week are eligible for overtime under the Fair Labor Standards Act (FLSA). The new federal overtime rules, submitted for review in 2015 by the Office of Management and Budget, are expected to raise that standard up to $970 per week. Additionally, the new rules are expected to redefine the duties of professional, executive and administrative employees who can be declared exempt from overtime, possibly eliminating the exemption status of around 21.4 million employees, according to DOL projections.

In order to limit the financial impact, franchisees will need to analyze whether it is more practical to limit employees to 40 hours or less per week, give raises to meet the new threshold, or reclassify them as non-exempt and pay them overtime. Even more complications are added to the mix when coupled with union implications across several industries, such as in retail, hospitality and healthcare sectors.

The Impact of Redefining Duties

For franchisees, the redefining of duties will also likely have a significant financial impact. Employers are now advised to take steps to identify currently classified exempt positions that might not qualify as exempt under the higher minimum salary threshold when implemented.

Currently, the exemption status standard revolves around what an employee’s main duties are, rather than how much time is spent on a specific task —this is known as the Primary Duties Test. For example, while a retail manager may log work hours helping customers or stocking shelves, they still qualify as a manager (and thus are exempt from overtime pay) because their main job is to manage other employees.

The new DOL regulations would instead rely on what is known as the California Test, which states that workers spending more than 50 percent of their time on non-exempt tasks are eligible for overtime pay, regardless of the non-exemption status of their primary job. In other words, under the new regulations, a retail store manager putting in more than half their time helping customers or stocking shelves would be entitled to overtime, regardless of whether their salary meets the new higher threshold.

To reduce the significant financial implications and overall increased labor costs, planning is required to consolidate positions, reclassify employees, and/or hire more part-time workers, especially for franchisees in the restaurant, hospitality, healthcare and retail industries.

Employee-Related Litigation

The proposed DOL rules also affect the franchise industry from another angle, by adding the dimension of legal risk. The DOL’s Wage and Hour Division has recently increased its investigations of wage complaints and compliance audits, with the number of FLSA cases having more than doubled since 2004. It is foreseeable that the new rules could trigger more actions by state and federal agencies, as well as additional private litigant activity.

With regards to the franchise model, the proposed regulations present challenges with respect to joint employer liability – opening the possibility of higher franchisor liability risks due to claims of incorrect employee classifications occurring at the franchisee level.

While franchisors need to advise their franchisees on the change in law, they will also need to make their own assessment—based on the nature and structure of their franchise program—about how much guidance and information they will provide to franchisees that may increase or reduce those joint employer liability risks.

Harold L. Kestenbaum is an attorney specializing in franchise law, engaged exclusively in the practice of franchise distribution and licensing law since 1977. He is the owner of HLK, P.C and has served on numerous boards and committees over the past two decades. Kestenbaum represents franchisors on a regional, national and international level from existing franchise systems to first-time franchisors. He is the author of So You Want to Franchise Your Business, the first book dedicated to franchise entrepreneurs.



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